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Friday, November 19, 2010

A Modest Proposal to Not Eat the Low Income Home Buyer

One of the tragedies facing many Americans right now is the loss, or potential loss of there home and everything they have invested in buying the home. In the popular imagination this is largely due to people who were not qualified being allowed to buy homes, but the reality is much more complicated.

Many of those who got the dangerous sub-prime loans were qualified for prime loans without the difficult balloon payments.  Often there credit was fine, but the bankers could make more money on selling the sub-prime loans.  The consequences of the balloon payments have taken there homes and ruined there credit ratings. Others were barely qualified and cajoled into taking larger loans to by more expensive homes  

Many people with prime loans, who formerly were economically secure, have lost there jobs or substantial portions of there income and as a result are now behind on there payments. If unemployment stays at over 9% there will be more people still waiting in the wings for this sad turn of events. 

If all of the above were not bad enough, along comes the home equity loan crisis, brewing right now.  If you think were have hit bottom, hold on for second bottom.  The Home Equity mess is just begging.  Under the home equity scheme, secure home owners were told they could turn there homes into ATM's, borrowing against a future rise, because under the new Capitalism, no balloon will ever again burst and you can pay it off  from the increasing value of your homes.  Just now many home equity loans, including one for members of my family, are coming due. Like the balloon payments on sub-prime loans, if you can't refinance and don't have a large bundle, it's bye-bye time to your mortgage.  

In the back drop of this were are hearing more and more that owning your home isn't such a good idea anyway, unless you are really well off.  Forget the American dream.  It was for suckers anyway.  

What has happened is that the bankers who used to hold on to your mortgage, now repackage it and sell it like reground sausage.  After some of it starts to go bad, they repackage it again in other financial markets. In the end your home is owned by people who don't know you, don't care about you, and are about to lose there shirt themselves.   

But lets take a closer look at that.  An economic and political theory called Distributism suggests that both modern capitalism and state socialism are wrong.  Both systems tend to concentrate ownership of businesses and by the way, housing. The wide spread ownership of homes in the US post World War II was due to interventions in the market including the deductibility of mortgage interest from taxes, government help for  the construction industry, GI loans, low interest low income home loans, etc.  Opportunities were created.  Strictly speaking, this doesn't neatly fit with distributism, because it does require some government intervention, but it also spreads ownership to more people.  Aquinas said property was a good thing, because it provides protection for us.  Now many are losing that margin of protection around them. 

What I think were need to do is not throw away the ideal, but re-examine how we do this.  How can we preserve and increase homeownership while reducing economic risk?

First of all, under a principle called subsidiarity, everything should be as close as possible to the local.  The government and the corporations need to shift from the concentration of power to it's distribution. That means going back to the old way of doing mortgages.  If fewer get made at first, at least fewer will be lost.  

Then we need a new way to get homeownership to the low and moderate income.  Several mechanisms can be looked at.  One could be land trusts, were land is set aside for such housing and in effect you own your home but the community controls the land.  This can be used to keep the cost of that land low, some the house will cost less.  It's a sort of cooperative ownership combined with individual ownership.  

Another means is for the government to extend the same kind of tax benefits for accounts that low and moderate income people would have to save for down payments on houses that they currently extended to certain retirement accounts.  This will allow a high percentage of the home purchase to be made by the down payment and make the risk safer, because the monthly payments will be lower. 

Finally consumer regulations will be needed to keep banks from pushing people into loans that aren't good for them.  That would be a proper function of government-- we can't each check the fine print of such complicated instruments, but experts can.  

These may be incomplete and possibly flawed proposals.  I hope some of you have other ideas so we can begin a dialog to develop better proposals. 

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